Every forex broker offering demo accounts advertises them as if they were gifts of free money. Their offers of $50,000 or $100,000 to trade are intended as enticements to sign up, with an inference that you won a contest or lottery. Rare that anyone turns down “free,” so erstwhile traders as well as the merely curious, jump in with both feet. Clever of those brokers!
Despite the tactics of some forex brokers, demo accounts are very useful. For one thing, they give novice traders a relatively painless introduction to forex. Second, they can help seasoned traders devise new strategies, test old theories, as well divert some of their pent up trading energy, perhaps while waiting on the sidelines for trade setups in their live accounts. Indeed, many traders, particularly intra-day traders, will trade a demo account in conjunction with their live accounts. The idea is similar to military training that simulates combat conditions. Professional soldiers train constantly, even if they have years of combat experience. Sharpen the skills, as well as learn new ones, with less risk.
Some brokers have eliminated the 30 day trial period on demo accounts. They know that traders-even those with live accounts-continue to trade demos, some intent on learning what it’s like trading with larger capital. It’s also a good selling tool for brokers, as traders will often try a variety of platforms and brokers until they find one or two, that fits them best.
While demo accounts can be useful, there are some aspects that traders should consider:
The Pros of demo trading:
- Demo accounts are risk free. You get to play with Monopoly money! This is both a positive and a negative. You may not risk real money, but you risk becoming too used to-addicted is not too strong a word-demo trading. The difference between somewhat relaxed demo conditions, and white knuckle, blood pressure spiking live trading, cannot be over stated. Nonetheless, demos don’t require use of your own capital, and unlike equites brokers, most forex brokers are not very pushy with sales followup emails or other solicitations.
- A great way to vet trading strategies.
- Excellent for learning trading, charts and platforms. The learning never stops for a trader. Demo accounts-particularly with a variety of platforms and brokers-can expose traders to different types of charts, software, and even indicators. Though some demo accounts seem to be faster than live accounts, likely due to different servers for demo and live accounts as well as bid/ask processing, they cover the basic parts fairly well.
... and a few of the Cons of practice demo account:
- Demo accounts are not real. Training with live ammo may give army commandos a feel of the real deal, but demo trading cannot when compared to live trading. With the commandos, there is risk of injury or death, and that’s a crucial difference. Traders tend to be more relaxed while trading demo. While this is good and should be emulated trading live accounts, demo trading often gives a false sense of confidence. Sometimes, traders whom trade quite well in demo accounts, are unable to repeat that success with live accounts.
- Bad trading habits can result. Everyone whom has ever traded anything has taken a leap of faith once or twice, and gotten away unscathed. This is one of the biggest drawbacks about demo trading. Without real money at stake, many will gamble more than trade. When they finally open live trading accounts, they lose money since they have acquired poor or incomplete trading habits. Anecdotal information suggest that demo trading reinforces poor money management. This is especially true of those that scalp.
- Can stall or limit transition to live accounts.